Behind the Mechanics of ETF Trading, Liquidity

When it comes to interpreting an ETF’s true liquidity, it is important for investors to look below the surface. Some suggest that new ETFs always carry elevated risks based solely on lower average daily trading volume, but that is not true. Newly issued ETFs can come with with deep liquidity, much of it unseen on a trading screen. Investors just have to take the time to look behind the curtains, so to speak.

An ETF’s true liquidity is more related to he liquidity of the underlying basket of securities. If an ETF exhibits low average volume, it does not mean that it is difficult to trade. Due to its innate creation and redemption process, ETFs are able to create and redeem shares based on supply and demand through the help of Authorized Participants whom work with ETF issuers and market participants to help provide more efficient or seamless ETF trades.

By working with a brokerage desk or an ETF provider’s capital markets team, investors looking into ETFs with low trading volumes may be able to capture efficient trades without negatively affecting the trade price.

Financial advisors who are interested in learning more about trading ETFs can register for the upcoming Tuesday, August 28 webcast here.